I go for a walk in Greenwich park, most days. Just to get out of the house. And to watch the bizarre consequences of Boris Johnson’s lockdown play out on the ground.

Increasing both fines and confusion at the same time was never going to work out well. Especially during a pandemic.

When you are expected to use common sense, only starting from an unknown future date, but those writing you a ticket do not use the same common sense, there’s bound to be trouble.

Every day during lockdown, my family would watch a police car chase the crowds across the grass in slow motion. The officers behaved much like toddlers and terriers chasing pigeons. If they ever decided to look in the rear-view mirror of their air-conditioned car, they’d see the flock reforming behind them. Until the next circling of the park, when the theatre repeats again. Usually with exactly the same people involved.

Most harassed of all are the people who sit down on park benches. A cyclist with a flat tyre? Swarmed by police in seconds. A family resting with their kid out of the baby carrier? Surrounded by pocketbook bearing badge wielders.

It’s not just that the guardians of law and order were spending the lockdown chasing confused people around the park in an endless circle. Lockdown also sent the economy into a tailspin too. A few months on, we’re finally able to make head and tail of the economic devastation wrought earlier this year. It was carnage out there, and it still is

Everywhere but the stockmarket, that is.

US tech stocks are at all-time highs. European stocks are going sideways. It’s as if nothing is happening in the rest of reality. Or stocks simply don’t care.

Today I want to think through a particularly interesting aspect of this. I call it the reckoning. And the question is where it will show up.

For a company to go bust, it needs to default on debt. That’s the point at which things fail in our modern economy. Mostly because leverage is part of almost every firm’s operations.

That leverage has a rather good side, by the way. It’s a big part of our prosperity. It allows firms to operate on a larger scale and at cheaper prices. More stuff for less money for consumers.

But the downside is the risk of failure. Firms can go bankrupt if they borrow.

That is of course no big disaster, necessarily. The assets of a bankrupt firm remain – the planes, the warehouses and the machinery. What changes in bankruptcy is who owns them and how they are used.

The old owners mismanaged the business – took on debt they couldn’t repay. The new owners after the bankruptcy use the same resources for a new and better purpose. Or they go bust too, reassigning the resources until they get used productively.

But in our modern world, things look very different.

Central banks and governments are keeping the firms that would go bust alive by helping them to roll over their debt. They can borrow more money to pay back the debt that comes due. So they can’t go bust.

This sounds nefarious – like a dodge. But only if you believe in repaying your debts slowly over time. Few firms actually do that – they manage their debt levels carefully and roll over their debt all the time. Just as governments do.

The question is not when and how fast to repay debt, but what level of debt is optimal. That’s what the field of corporate finance is about.

The trouble is, the optimal level of debt is not the same during a pandemic… Hence the crisis. But back to the topic – companies rolling over their debt.

The difference right now is how easy governments and central banks are making it to refinance. The consequence is that even the likes of the cruise ship company Carnival can refinance itself. It doesn’t go bust. It always finds a bond buyer to refinance its debts, even if it has to be the central bank itself.

This is great news, at first. The employees stay employed and the business survives. It’s like a patient on life support.

But what’s wrong with it? What are the negative consequences?

There are some obvious ones. Small businesses without access to central banks are in trouble. That’s why the small-cap index in the US is dramatically underperforming the big firms in the Nasdaq and S&P 500 indices. But the real pain is outside the stockmarket. So it matters less to central bankers, no doubt.

But let’s think more broadly and simplify a little.

If printing money and lending it out to every company at risk of failure is good economic policy, why haven’t we been doing it all along? Why has anyone ever gone bankrupt?

If you can keep companies going indefinitely, through any crisis, by assisting them to roll over their debts, which staves off bankruptcy, why not do so forever?

What is wrong with it? Where is the reckoning?

I’m not sure. But there are a few possibilities worth exploring.

Part of the answer is a type of stagnation. Which is tough to explain.

The economy is constantly undergoing change. Blacksmiths become welders and horsepower becomes a measure for combustion engines.

This involves turmoil for blacksmiths and the horse industry, of course. Including the failure of their businesses. But it is also the measure of progress in the sense of prosperity. Because of the productivity gains and living standards.

Given how much poo the police horses produce, and the smell, I can’t imagine London before cars… No doubt I’ll say the same of electric cars in a few years’ time…

But what happens if you keep the blacksmiths from having to change? What if you encourage the horse-related industries to survive by rolling over their debts? What if nobody goes bust?

I think you get economic stagnation. You lose the efficiency gains and prosperity which the turmoil of the economy allows.

If resources aren’t freed up, they can’t be put to alternative and more productive uses. They can’t be reassigned to make better things in better ways. Productivity stops going up – the source of GDP growth.

In a world like this, it’s tough to find booms and economic gains. Because resources are being used for unproductive things – in attempts to prevent failure instead of allowing booms.

So perhaps the reckoning comes in the form of poor economic growth. A bit like in Japan, where companies are kept on life support in notoriously odd ways.

Given my lockdown life consists of a steady stream of nursery rhymes – I didn’t realise they actually work until three months ago – I can’t help thinking about all this in terms of nursery rhymes.

Just as the “Ring a Ring o’ Roses rhyme” is about the Black Death, I can’t help wondering whether the “And they all rolled over” song is actually about a debt crisis. With bond markets rolling over and one falling out.

The question is, who will it be? Who does fail in a world where money printing saves all?

Top of the list of casualties is the value of money. If more of it is being printed, and it’s being put to unproductive uses as described above, well that suggests stagflation.

Ironically enough, and completing the circle of absurdity, these days money itself is debt. The money supply isn’t just created by central banks, it is also loaned into existence.

When you spend money on your credit card, that money doesn’t come from somewhere. It is created, as a debt, in the moment you spend it. You owe the bank and the money is created in a synonymous and synchronised moment.

This also means that the money supply depends on people’s willingness to borrow. Usually, during an economic shock, that contracts the money supply as people borrow less. But in the world we live in now, borrowing capacity isn’t something central banks care about. Only your need to borrow. Debt is a policy tool, not something we choose to borrow.

But never forget that not all money is based on debt. Gold becomes money after inflationary collapses for a reason. Although this would be so embarrassing for the world’s monetary authorities today that they’d no doubt do anything to prevent it.

Regardless, it’s no surprise that gold nudged new highs.

Source: Bullion By Post

Another option to escape debt-based-money is cryptocurrencies.

They’re not based on debt and their supply is limited by the code they operate on.

Best wishes,

Nick Hubble
Editor, Southbank Investment Daily